Islamabad: The Securities and Exchange Commission of Pakistan (SECP) has intervened to halt Mughal Iron and Steel Industries Limited's proposed issuance of 50 million unlisted Class C ordinary shares, citing concerns over corporate governance and minority shareholder rights. The company had submitted a draft right offer document to the SECP, outlining its plan to issue these shares at Rs. 30 per share, with each share carrying 50 voting rights but no dividend rights. This issuance was intended to account for 14.90% of the company's existing paid-up capital.
The company's current structure includes 335.60 million ordinary shares, each carrying both voting and dividend rights. The new issuance would result in an additional 2,500.00 million voting rights, significantly altering the existing voting power dynamics. Post-transaction, the voting rights of ordinary shares would plummet from 100% to 12%, while the Class C shares would command 88% of the voting rights, without any dividend entitlement.
The SECP has scrutinized the proposal, highlighting the importance of the "one-share one-vote" principle, a cornerstone of corporate governance ensuring equitable treatment of shareholders. According to information available from Pakistan Stock Exchange (PSX), this transaction appears to deviate significantly from this principle, allowing the sponsors to retain control without holding a substantial portion of ordinary shares. This could lead to a skewed governance structure where shares with vast voting rights have no dividend rights, and vice versa.
The plan has drawn criticism for potentially disenfranchising minority shareholders, who rely on dividend prospects and share liquidity as investment motivators. Issuing unlisted Class C shares devoid of dividend rights could render them unattractive to minority shareholders, enabling sponsors to consolidate ownership.
The Securities Act, 2015, which governs listed companies, does not support the issuance of unlisted ordinary class shares. The SECP, aligned with its mandate to protect minority shareholders and uphold investor confidence, considers this issuance incompatible with the Act's principles and market integrity.
Key stakeholders, including the Pakistan Stock Exchange, Mutual Funds Association of Pakistan, Pakistan Stockbrokers Association, and CFA Society Pakistan, have expressed apprehension over the negative ramifications for the capital market. They highlight a potential erosion of investor confidence and market stability.
Despite ongoing discussions, Mughal Iron and Steel announced a book closure period from February 5, 2025, to February 11, 2025, signaling its intent to proceed with the transaction. However, the SECP, invoking its authority under section 100 of the Securities Act, 2015, has directed the company to suspend the issuance until further notice and to address the SECP's concerns on February 3, 2025, at a scheduled meeting in Islamabad.
The SECP's directive underscores its commitment to upholding public interest, shareholder rights, and corporate governance standards.